When using the CAPM to estimate the cost of common equity for a company in a developing country, an analyst should most appropriately:（）
A. add a country risk premium to the market risk premium.
B. add the sovereign yield spread to the CAPM cost of common equity.
C. multiply the equity’s beta by the ratio of the volatility of the developing country’s equity market and a developed country’s equity market.
参考答案：A
解析：
The appropriate method for estimating the cost of equity for a firm in a developing market is to add a country risk premium (CRP) to the market risk premium, so the revised CAPM equation becomes: ke=RF+β[E(RMKT)-RF+CRP]. The CRP is the sovereign yield spread adjusted for the volatility of the developing country’s equity market. An alternative approach is to add the CRP (not the sovereign yield spread) to the cost of equity as calculated from the CAPM. The CRP is necessary because beta does not fully capture country risk. However, adjusting beta is not the recommended approach.
